BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1378 HEARING: 5/7/14
AUTHOR: Morrell FISCAL: Yes
VERSION: 4/7/14 TAX LEVY: Yes
CONSULTANT: Urquiza
INCOME TAXES: CREDITS: CHARITABLE CONTRIBUTIONS
Enacts a tax credit for contributions to qualified
charitable organizations.
Background and Existing Law
Federal and state laws allow taxpayers to claim an income
tax deduction for charitable contributions. The deduction
lowers the amount of income on which the tax rate is
levied, reducing the taxpayer's tax liability. For
example, a taxpayer with $100,000 of annual income is
subject to a state rate of 9.3% and a federal rate of 35%.
Therefore, if the taxpayer makes a $100 contribution to a
charity, a $100 reduction in the taxpayer's taxable income
generates a $10 benefit from the state, and about a $35
benefit from the federal government. These benefits create
a charitable giving incentive for taxpayers. Deductions
for cash donations may not exceed 50 percent of a
taxpayer's adjusted gross income. A contribution made in
excess of the percentage limitations may be carried over
and deducted in future years.
Unlike deductions, which reduce the amount of earnings that
are taxed, tax credits are applied after the taxable income
is calculated and reduces-dollar for dollar-the amount of
taxes owed, usually up to the ceiling on the tax credit or
a percentage of the taxpayer's costs or contributions.
California provides various tax credits designed to provide
incentives for taxpayers that incur certain expenses, such
as child adoption, or to influence taxpayers' behavior,
such as research credits. The Legislature typically enacts
tax credit to encourage taxpayers to do something that, but
for the tax credit, they would not otherwise do.
A handful of states, including Arizona, Michigan, North
Carolina, and Missouri have enacted state charity tax
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credits to stimulate charitable giving. Unlike the
charitable tax deduction that is available for
contributions to any 501 (c) (3) or religious organization,
charitable tax credits typically are restricted to
contributions to specific types of charities, such as those
directly serving the poor.
Proposed Law
Senate Bill 1378 enacts a tax credit against the Personal
Income Tax for charitable contributions to qualified
charitable organizations, for each taxable year beginning
on or after January 1, 2014. The credit is equal to the
amount donated by the taxpayer during the taxable year and
cannot exceed:
$250 for individuals filing as either single or as
a head of household, or married taxpayers filing
separate returns; or
$500 for married taxpayers filing joint returns or
an individual filing as a surviving spouse.
SB 1378 defines a "qualified charitable organization" as an
organization that meets all of the following requirements:
Is an organization that is exempt under Internal
Revenue Code section 501(c)(3) or is a designated
community action agency that receives community
services block grant moneys;
Spends at least 50% of its budget on services to
California individuals who receive California Work
Opportunity and Responsibility to Kids (CalWORKS)
benefits, are low-income individuals whose household
income is less than 150% of the poverty guidelines,
are chronically ill, or are physically disabled
children;
Demonstrates that it plans to continue to spend at
least 50% of its budget on services to those persons
listed above;
Applies for certification from the Franchise Tax
Board (FTB) and receives such certification that the
organization meets all of the requirements.
SB 1378 requires FTB to post the names of the qualified
charitable organizations on its Internet web site.
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The bill allows for credits in excess of the net tax to be
carried over to reduce the net tax in the following year
and succeeding four years, until exhausted. The tax credit
is in lieu of any charitable deduction otherwise allowed.
State Revenue Impact
According to the Franchise Tax Board, a credit with a
$250/$500 cap for each taxpayer would result in an
estimated revenue loss of $300 million in 2014-15, $45
million in 2015-2016, and $18 million in 2016-17. Should
the measure be amended per comment #8, revenue loses would
be significantly higher.
Comments
1. Purpose of the bill . According to the author, "This
bill will offer charities an ability to market to their
donors. The opportunity to genuinely give back to the
community through supporting charitable organizations is an
uplifting experience that more people should have. With
this bill, California rewards and incentivizes the chance
to help make a difference in the life of another
individual. Providing tax credit for charitable giving is
an excellent way to make sure that charities can continue
with their work, especially given the current economic
climate. The United States has seen an unfortunate
decrease in donations in the past eight years. In
California alone, the average charitable contribution per
return dropped by over 200 dollars between 2006 and 2011.
Giving tax payers the opportunity to claim a tax credit for
cash contributions will benefit charities and the
communities alike."
2. Redirection or new money ? The underlying motives for
charitable giving are complex and not fully understood by
economists. Empirical studies generally find that, to some
degree, taxpayers respond to the after-tax price of giving
to some degree. According to a report from the Johnson
Center for Philanthropy, Michigan residents significantly
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decreased donations between 2011 and 2012 due to the
expiration of the Michigan Community Foundation Tax Credit.
In Arizona, creating a tax credit for donations to
charities seems to have resulted in additional donations to
the nonprofit sector. However, a 2004 study by the Urban
Institute Center on Nonprofits and Philanthropy on
Arizona's tax credit found that it was not clear if
taxpayers generated a "substitution effect" away from some
charities by redirecting their contribution to the
certified charitable organizations. Although a tax credit
may entice new taxpayers to contribute to charities, a tax
credit may also redirect contributions from charities that
currently receive them to charities that qualify under the
tax credit program.
3. Oversight . Charitable tax credits reduce taxpayer's
state income tax liability dollar-for-dollar, which means
that those gifts are free. While SB 1378 gives certain
nonprofits the opportunity to market a no-cost donation to
taxpayers, it might also create an industry of illegitimate
nonprofits pooling donations for purposes other than
serving underserved communities. It is unclear whether FTB
has the authority to reliably certify and audit qualified
charitable organizations to ensure that they are spending
their resources as intended under the tax credit
guidelines. The committee may wish to consider the
unintended consequences of enacting a tax credit for
donations to charitable organizations without a mechanism
to ensure that the qualified charitable organizations are
complying with state law.
4. Tradeoffs . While providing tax credits can promote
charitable giving, SB 1378 will result in revenue losses,
which have to be paid for with higher taxes on others or
reduction in services. The Committee may wish to consider
whether SB 1378 is a cost-effective way to grow charitable
giving and whether it is worth the tradeoff of cuts in
spending or raising taxes to offset foregone revenue.
5. Let's be clear . The bill states that its credit is in
lieu of a charitable deduction. This has the effect of
denying all charitable deductions, not just the deduction
for this contribution, including a deduction amount that is
above the cap on the tax credit. This can have the
unintended consequence of discouraging charitable donations
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in excess of the cap if a taxpayer is not able to deduct
the rest of his or her donation. The committee may wish to
consider amending the bill to limit the denial of a
deduction to amounts that provide the basis for the credit.
The bill also uses phrases that are undefined, such as
"chronically ill," "physically disabled children," and
"services." The absence of definitions to clarify these
phrases could complicate the administration of the credit.
The committee may wish to consider amending the bill to
define these terms.
6. Delayed implementation . FTB must certify a qualified
charitable organization before implementation of the tax
credit. The committee may wish to consider amending the
bill to delay implementation to January 1, 2016, to give
FTB time to develop policies and guidelines to certify
qualified charitable organizations.
7. Lack of sunset and reporting . As drafted, this bill
has no sunset date. Sunset dates enable the Legislature to
review the efficacy of tax expenditure programs in the
future. In addition, this bill lacks any provision
requiring FTB to report back to the Legislature regarding
credit utilization.
Committee staff recommends the following amendments:
Adding a sunset date of December 1, 2019.
Requiring FTB, or another entity, to report back to
the Legislature on credit utilization and
effectiveness.
8. Ongoing or one-time ? SB 1378 creates a nonrefundable
credit for individuals who make contributions to a
qualified charitable organization for each taxable year
beginning on or after January 1, 2014. However, the
measure caps the total tax credit amount at $250/$500, so
if the taxpayer donates above that amount, they can't claim
the credit in the future. The Committee may wish to
consider applying the cap to each taxable year instead of
on each taxpayer.
Support and Opposition (5/1/14)
Support : Unknown.
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Opposition : Unknown.